The research and analysis of stocks in search of great investments is a grueling process, but ultimately rewarding and can even be fun. However, a recent research piece by Matt Rothman, who is head of quantitative strategies at Barclays, implies that this research has become less relevant as returns among individual stocks are more strongly correlated than ever. He writes, "The reason this matters to all stock pickers -- fundamental or quantitative -- is because with stock return dispersions at all-time lows, it is extraordinarily difficult to be picking stocks. The decisions that matters are related to style selection, not stock selection."
Some will blame this on the absence of the retail investor, as worries of another flash crash or 2008-style downturn remain fresh in their minds. However, if one looks at the average volume of all stocks traded domestically, we can see where the problem lies.
In June, of the four most-traded investments, only one, Apple (Nasdaq: AAPL), was an actual individual stock. The SPDR S&P 500 ETF (NYSE: SPY), which tracks the S&P 500 index, accounted for 10.5% of total U.S. market volume, while Apple (Nasdaq: AAPL) was a distant second, representing just 2.8%. Rounding out the list are the iShares Russell 2000 ETF (NYSE: IWM) and the Nasdaq 100 Trust (Nasdaq: QQQQ), which track the Russell 2000 and Nasdaq indexes respectively.
As the saying goes, a rising tide lifts all boats. With the majority of volume concentrated in these instruments, investing has become more about market timing then stock picking. This is the perfect environment for high-frequency traders, robots, and really smart computers, but it is not so great for us Fools.
So is stock picking going away? As long as businesses continue to remain profitable and create cash flow, the answer is no. When stocks become too cheap, if you don't want to buy them, someone else like Warren Buffett will.
Investing isn't supposed to be easy. If it were, there wouldn't be so much opportunity to profit. So be wary of the day-to-day volatility created by the massive volume in these ETFs, but keep researching for undervalued gems. Nothing of value ever comes without hard work.
